This paper uses an example hospital budget shown in Table 2 on page 6. The variances (difference between actual and budgeted amounts) for the different categories are also shown. An analysis of several of the expense categories is detailed below, in Table 1.
In Table 1, the variance of each budget item is computed by subtracting the budgeted amount for that item from the actual costs for the item. If the result is a negative number, it means that the actual costs are lower than the budgeted amount, and there is a negative variance. If the result is positive, the actual costs are higher than the budgeted amount. In the table, positive variances are shown in red to indicate that these budget items need some attention from management because that category of budget item went over budget. In the table, the right-most column provides a possible explanation for why that item had a variance (either positive or negative).
Table 1. Analysis of Variances for Several Expense Categories
(Overbudget variances are in red; underbudget variances in black.)
|Category||Actual||Budgeted||Var||Var %||Var Analysis|
|Salaries||$10,983,278||$10,871,748||$111,530||+1%||Overtime pay for staff increased salary costs.|
|Fringe Benefits||$2,611,676||$2,861,538||($249,861)||-9%||Expected vacation and sick days were not taken by staff.|
|Professional Fees||$725,516||$591,012||$134,504||+23%||Using contract nursing staff to cover gaps in nursing staff coverage elevated costs.|
|Purchased Services||$1,430,815||$1,387,247||$43,568||+3%||Extra service calls on equipment and upgrade costs required technical support.|
|Patient Care Supplies||$3,827,271||$3,837,814||($10,543)||0%||In-house effort to reduce wastage gave modest success.|
|Non-Patient Care Supplies||$322,431||$335,872||($13,442)||-4%||In-house effort to reduce wastage was modestly successful.|
|Drugs/IV Solutions||$1,483,722||$1,292,626||$191,096||+15%||Two major weather disasters plus a moderately intense and extended flu outbreak increased IV and drug usage above normal.|
Improving Budgeting with Benchmarking
One technique that assists with managing a budget in any organization, but specifically in healthcare organizations such as hospitals and clinics is benchmarking. This is a technique in which the organization’s results are compared to any (or all) of its own performance in prior years, or to the performance of a similar organization, or to a performance standard that a professional organization sets as an attainable goal (Goldberg & Fleming, 2010, 309).
For example, benchmarking an organization against itself may be helpful if previous years’ expenses and revenues are comparable with expected following year. In such a case, benchmarking would consist of making a best-estimate of expected revenue, then determining how expenses can be driven down. Management receives estimated budgets based on this historical record to assist with holding costs at the lowest possible levels. These historical budgets provide a guide to the managers to help them stay within budget. It may also help if managers receive bonuses or other incentives for staying in budget.
A second type of benchmarking is comparing the organization’s performance to that of other similar organizations. In this type of scenario, it is worthwhile to pay visits to such organizations to interview their management and consider how that organization’s financial experience compares. For a typical hospital approximately 60% of the budget is spent on labor, and most of that is spent on nursing labor (Goldberg & Fleming, 2010, 309). This means that benchmarking other hospitals that service nearby communities can confirm that nursing (and other staff) salaries and benefits are on a par with the community norms. In addition, it can be helpful to assess the span of control of those with management titles to determine if salaries, titles, and reporting staff are all in line with community and professional standards. When doing such comparisons, however, it’s important to know the level of performance that is desired to be achieved. Is the goal to just be in the middle of the pack, somewhere around the median performance and cost control? Or is the objective to be a top-rank organization. Such decisions determine what kind of benchmarking is needed and which organizations would be most important in such external comparisons (Berger, 2004, 78).
The third type of benchmarking is to compare the organization’s performance with performance norms determined by outside organizations. This is extremely helpful in two major cases. First, one is with the accreditation of the hospital with state and national organizations. While non-financial standards are a large part of such accreditation, those standards do include financial measures to confirm financial stability and cost control. Another, highly prestigious benchmarking process is that of the Malcolm Baldrige Award. In this latter case, healthcare organizations consistently report that merely applying for the award, with all the measures, self-reflection, and organizational benchmarking that application entails, frequently results in significant improvement, in large part because it includes benchmarking both against pefromance norms and against the highest-performing healthcare organizations and using those external norms as performance standards (Sister Mary Jean Ryan, 2002 Award recipient, Baldrige Performance Excellence Program, 2010). The disadvantage of the Baldrige Award form of benchmarking is that it requires a tremendous time and manpower commitment at all levels up to and including the CEO of the hospital.
Of these three forms of benchmarking, one of the most important mechanisms to create improvement is to benchmark against other organizations. This is preferred over simply comparing against the organization’s own past performance because it’s difficult to see areas of improvement within your own organization simply because it’s so familiar. By looking with open minds at how highly efficient, cost-effective organizations operate, new ideas and new potential savings can be more easily seen. Ideally, this type of external benchmarking would be done once a year to ensure that financially the company stays on track (Clark, 2005, 80).
To optimize budget performance, the focus should be on controlling labor costs. This implies not only ensuring that salaries are controlled, but also managing overtime by ensuring enough staff to operate are available at all times. This also implies that managers must keep the use of temporary or contract professional staff to a minimum. One way to do that is to use benchmarking of similar organizations to ensure that salaries and benefits are in line with community standards. This will permit the development of more realistic budgetary targets that can be more readily maintained. By analyzing the use of contract staff, staffing levels can be designed to better anticipate the needs of the organization.
Benchmarking at all three levels is useful. Comparison to the organization’s past performance allows the development of budgets that reflect actual demand and history over the years Benchmarking to external standards ensures that the hospital meets all required standards, and, in the event of trying for a major national award, such as the Baldrige Award, the simple process of performing the benchmarking can significantly improve the organization’s efficiency and cost controls. But possibly one of the most useful benchmarking techniques is to do direct external benchmarks with other similar organizations to determine best management and cost control practices. By understanding how other organizations operate, it is possible both to see improved practices, and also pitfalls to be avoided. Because it is an external organization, however, it’s also easier to see both the flaws and improvements they execute in their organization. A little distance provides objectivity to see things clearly.